Diageo to pay $2 billion for stake in Indian distiller

Updated 7:49 pm, Friday, November 9, 2012

Bloomberg News

Diageo, the maker of Johnnie Walker Scotch, will buy a 53.4 percent stake in India's United Spirits for 111.7 billion rupees ($2.04 billion) to gain leadership in the world's largest whiskey-consuming nation.

The British distiller will acquire a 27.4 percent stake at 1,440 rupees per share and will make a tender offer for 26 percent of United Spirits, the companies said Friday. They first disclosed that they were in discussions in September.

United Spirits Chairman Vijay Mallya and others are selling a 19.3 percent stake in the maker of McDowell's No. 1 whiskey as his Kingfisher Airlines struggles with a cash shortage. The Indian distiller has a leading 43 percent share of the country's whiskey market, which Euromonitor International estimates will grow by about 50 percent to $31.1 billion in the five years through 2016.

Diageo, which already sells its Johnnie Walker whiskey and Smirnoff vodka brands in India, will benefit from United Spirits' distribution network and the company's experience with negotiating complex rules that govern India's liquor business, according to P. Phani Sekhar, a fund manager with Angel Broking.

"The liquor business is a very high entry-barrier business because of the state-level regulations," he said. "This business has been cracked by Mr. Mallya over a period of time."

Diageo, which has its North America headquarters in Wilton, is paying about 20 times United Spirits earnings before interest, taxes, depreciation and amortization in the period ended March 31, 2012, it said. That compares with a median of about 17 times for comparable transactions in the last 10 years.

"If you look at emerging-market transactions in the consumer space, this multiple is not out of line," Diageo Chief Financial Officer Deirdre Mahlan said on a conference call Friday. "There is no doubt that India is one of the most exciting, if not the most exciting market in Asia. So the multiple reflects the value we can deliver."

Diageo is seeking growth in markets outside Europe, as part of its plan to get half of its net sales from developing markets by 2015. The distiller is keen to make acquisitions in the Asia-Pacific region, Gilbert Ghostine, president for the region, said in an Oct. 1 interview. The company gets about 14 percent of sales from Asia-Pacific and is "on-track" to raise emerging-markets revenue to 50 percent from 40 percent, he said then.

"This business has already got very good brands, and its got very good routes to market," said Diageo Chief Executive Officer Paul Walsh in a Bloomberg TV interview. "But I do believe we can step up our expertise in marketing, in innovation and at the right time we can leverage those routes to markets for our global brands."

Diageo had only 0.1 percent of the Indian whiskey market in 2011, behind Pernod Ricard's 15 percent, Euromonitor said.

The British company has no plan to take its ownership of United Spirits to 100 percent or to integrate the businesses, Mahlan said on the call. "Given that we are acquiring a distinct and separate business, there is not a significant amount of cost synergies," she said.

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Prior to this agreement, Diageo had announced 12 deals valued at $2.87 billion over the last three years, including Turkey's Mey Icki raki brand for about $2.1 billion last year. Walsh said Friday he would still like to gain control of tequila brand Jose Cuervo.

"In the last couple years this company has become much more acquisitive and people will have to say that that is a good thing," said Chris Wickham, an analyst at Oriel Securities.